Developers

Usage-Based Billing for SaaS: Is It For You?

Usage-Based Billing

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Also called metered billing or pay-as-you-go pricing, this allows customers to only pay for what they've used in each billing cycle.

Do you pay your internet bills or use Uber? Then you’re already an ace on how usage-based billing works from the consumer end. Basically:

You use a product or a service

The company providing the product/service has a metering system in place to measure your consumption

You probably pay a base amount plus the charges for what you’ve used every billing cycle

But while this is common in infrastructure services and cloud computing services like Amazon, it’s not an obvious choice for SaaS. So how can you qualify if usage-based billing will work for your SaaS product?

Understanding Pay-As-You-Go Pricing in SaaS

Traditionally, usage-based billing is adopted when a business has a clear unit of measurement associated with how much of its product or service a customer uses. Think of this usage in terms of a box of candy. You only pay for the number of candy pieces you’ve removed from the box within a period of time, it doesn’t matter how many people have access to the box or how long they took to eat them.

But in SaaS, this kind of pay-as-you-go pricing often includes additional dimensions. Because it’s not only the rate of customer consumption that matters, it’s also the value associated with the product which is called the value metric. (Was the candy tasty?)

And perhaps the candy comes in different flavours. Does each flavour match a customer base with enough demand and act as a gateway for a person to try other, higher-priced flavours? You get the idea.

Having a basic unit to measure usage that’s not time or user/seat based is a primary differentiator of the usage-based billing model. Also, unlike the user-based model where customers pay in advance for increasing seats or usage time, pay-as-you-go only charges customers post usage.

Let’s look at a few examples of companies that have successfully implemented pay-as-you-go prices in SaaS and what they bill against.

User-based billing, on the other hand is simpler and more straightforward for help desk software or team collaboration tools. Companies like Slack, Google, Box, Webex, Atlassian, Salesforce, Freshdesk and Zoho are all major SaaS players that charge per user.

Prerequisites and Considerations for Usage-Based Billing

So you think usage-based billing may be just the ticket for you. What does setting it up involve and in what ways can you expect it to provide value for your customers?

To implement a usage-based billing system, you need:

To figure out your equivalent of a piece of candy

A critical number of heavy users in your customer base for revenue stability. One of the downsides of this model is unpredictable revenue fluctuations based on customer usage

A good metering system or other accurate methods to collect user consumption data

Logic to convert the consumption data into readable billing information which is sent to a billing system for invoice creation

Customer benefits

The rise in popularity of usage-based billing in SaaS has mainly been driven by customer demand and awareness:

For low to mid-volume users, it’s a better deal compared to flat rates as they aren’t charged for unconsumed resources

In the case of subscriptions that auto-renew, it saves a lot of money if the customer only has seasonal use for the product

The SaaS provider thus needs to work to ensure that the customer always finds good value in the product/service

A fair billing policy also shows financial accountability and a commitment to the customer which builds trust and loyalty.

Usage-based billing gives your customers more flexibility and control over their spending. It’s like buying a single ticket for a subway ride, as opposed to a travel card with a month’s validity which they may not use everyday. It’s not always the right choice, but in SaaS it’s an important one to consider.

Pro Tip

Should you switch to usage-based billing from your current pricing model?

First, analyze customer behaviour, purchase history and your overheads to see if the switch is required and will provide an opportunity for higher revenue. If the answer to ‘Can my business survive/thrive with unpredictable recurring revenue?’ is a negative, a switch is not advisable.

And a 2017 Gartner study, mentions two more things to keep an eye on while adopting a usage-based billing model:

While offering greater flexibility, [usage-based billing] will likely be more expensive per unit than committed volumes, and so must be carefully analyzed and limited to the most appropriate, cost-effective scenarios

It will force some SaaS pricing metric changes for existing customers, as some SaaS metrics are not well aligned to usage-based charging

There’s no formula for calculating if a pricing model will work for you (it’s a skillset that entrepreneurs learn over time), but you should explore the possibility if you think it makes better sense in terms of revenue and customer retention.

The Billing Intelligencer

Useful guides and expert opinions on the past, present and future of SaaS pricing models, and specifically, usage-based billing: